xvi Introduction:TheQCulture
On the other hand, some assets may be understated on a balance
sheet (such as reserves of a natural gas company as well as land
values). Off–balance sheet liabilities relating to environmental prob-
lems, post-retirement health benefits for employees, and stoc kop-
tions for managers also must be included as adjustments to reported
figures. You need not know every detail, but a working understanding
is necessary and can be developed with a modicum of effort as part
of a business analysis mind-set.
Tied to the question of certainty in evaluating the long-term
characteristics of a business is the certainty with which you can rely
upon management to channel rewards to shareholders. It remains
true that mouth-watering economics is the most important variable
in evaluating any business for investment. Poor economics can
rarely, if ever, be cured, even by exceptional management, and in-
ferior management can harm a good business (though it is harder
for bad management to damage an outstanding business).
This management reality—coupled with the inadequacy of mar-
kets and the potential unreliability of numbers—demands that an
investor also appreciate the qualitative dimensions of business anal-
ysis. The most important of these are those qualities that indicate
that a company has an owner orientation.
Holding an owner orientation is not required of corporate man-
agers as a matter of law or even by practice or custom. Nor will such
an owner orientation be achieved merely by arranging the corporate
rules in certain ways, such as having large numbers of outside di-
rectors or separating the functions of the CEO and the chairman of
the board. Accordingly, the focus on managers is a focus on trust-
worthiness.
Assessing the trustworthiness of corporate managers is much like
assessing the trustworthiness of a prospective son-in-law. It is a mat-
ter of common sense—again, a rare but acquirable mind-set. In the
context of corporate managers, sources of insight into managerial
trustworthiness include business records and qualities of commu-
nications to shareholders—the CEO letter in particular. Examples
of this art finish off the book, the final chapter giving an account of
the letters of Jac kWelch (GE), Mi ke Eisner (Disney), and the late
Roberto Goizueta (Coca-Cola).
The fol kwisdom of “minding your Ps and Qs” does not refer to
prices and quotes but to common sense. In investing, this means
grasping the basics of finance, accounting, and governance to see
that the following occurs: